I settled into the WorldCom meeting expecting a somber, unhappy crowd of shareholders. After all, since the last annual meeting, the stock price had fallen more than 52%.
I couldn’t have been more wrong. Ebbers was already in the room when I arrived, meeting and greeting, and seemed more at ease than I’d seen him in a couple of years’ worth of these annual events. And the shareholders were relaxed, laughing at all his jokes and avoiding the difficult questions.
Along with the usual business that occurs each year, one very important event was taking place. The shareholders were voting on a plan to create two tracking stocks from the one stock known as WorldCom.
With all its mergers in the last few years, WorldCom found itself with two types of businesses under one roof. The WorldCom group is the fast growing piece that includes “data services, Internet-related services, commercial voice services and international services businesses.” And the MCI piece is the slow grower that includes “long distance voice communications, consumer local voice communications, wireless messaging, private line services and dial-up Internet access service businesses.”
To create two different stocks which track the various operations of one company is no small feat. Where once there was one set of financial statements, now there are two. The financial statements of the parent must be dissected and separated to represent the new entities.
Why go to all this trouble? Along with a difficult business climate, WorldCom faced a perception problem. Investors saw two very different performing pieces in one stock. Some want only the high-growth piece, while some prefer the stable, cash-rich piece. Meanwhile, the stock of the united company fell in between, into mediocrity. So, why not sell the MCI piece?
This is where the beauty of tracking stocks is revealed, because they allow the parent company to have their cake and eat it too. The fast grower, the WorldCom group, needs cash to build out networks and continue to grow. While the WorldCom group is, in a sense, a cash hog, MCI is a cash cow. The consumer long-distance business has limited growth opportunities, but it is still making money. How do you get the cash to leap from one set of financials to the other?
First, when you pull apart the balance sheet of the parent, you give most of the cash balances to the more needy child, WorldCom group. Next, you give the bulk of the assets to WorldCom group and charge MCI for the use of them. In fact, WorldCom group actually owns the trademark “MCI,” and MCI must pay them for use of it. Is this brilliant or what?
Combine this with a board of directors empowered with a great deal of flexibility in managing these two stocks, and you have a formula (they hope) for success.
The WorldCom group trades under the symbol WCOM, and MCI trades under the symbol MCIT. To attract investors to MCI, they will do something that the old WorldCom stock never did. They will pay dividends. Each quarter, shareholders will receive $.60 per share. With the stock trading at $18.88 per share, that’s an annual yield of 13.2%. That’s quite an attraction that beats most stocks and bonds currently available! WorldCom group, on the other hand, will continue to reinvest all earnings to fuel its high-octane machine.
By the end of the meeting, it was a done deal. If you had 100 shares of WorldCom before, you now own 100 shares of WorldCom group and 4 shares of MCI. The question remains for existing shareholders, “Which do you want to own?” Some may decide to reap the rewards of a high-yielding stock now, while others will bet the farm on the prospects of the fast grower. Still others will look at the decline in the last 12 months and look for greener pastures.
I wonder who’ll be laughing next year.
Nancy Lottridge Anderson, CFA, is president of New Perspectives Inc. in Clinton, (601) 924-9828. Her e-mail address is firstname.lastname@example.org, and she’s online at www.newper.com. Her column appears frequently in the Mississippi Business Journal.
BEFORE YOU GO…
… we’d like to ask for your support. More people are reading the Mississippi Business Journal than ever before, but advertising revenues for all conventional media are falling fast. Unlike many, we do not use a pay wall, because we want to continue providing Mississippi’s most comprehensive business news each and every day. But that takes time, money and hard work. We do it because it is important to us … and equally important to you, if you value the flow of trustworthy news and information which have always kept America strong and free for more than 200 years.
If those who read our content will help fund it, we can continue to bring you the very best in news and information. Please consider joining us as a valued member, or if you prefer, make a one-time contribution.Click for more info